SYDNEY (Reuters) - The Australian dollar faltered from near a two-month top on Friday after a contraction in factory activity in the country's top trading partner China dented risk appetite, although the currency was still on track to end the week with handy gains.
The Aussie, a liquid proxy for Chinese assets, skidded 0.5 percent after the Caixin/Markit index of manufacturing fell to its lowest since February 2016.
That gauge of factory activity was more downbeat than the official version of the index and fanned fears of a steeper slowdown in the world's second-biggest economy.
The Aussie was last at $0.7239 from Thursday's $0.7295, a level not seen since early December.
Despite Friday's losses, the currency is up 0.8 percent so far this week after jumping more than 3 percent in January - its second best month in a year.
The New Zealand dollar was last off 0.2 percent at $0.6910. It is so far up 1 percent this week.
Weighing on the Aussie, data on Friday showed Australia's property market remained in a downward spiral with the pace of declines quickening.
"Prices have now fallen by 7.6 percent from their peak in July 2017, which puts the current downturn on the cusp of becoming the largest on record in Australia," said Ben Udy, Singapore-based economist for Capital Economics.
"We believe this downturn will result in weaker dwellings investment and slower consumer spending, which would drive a slowdown in GDP growth."
Udy expects the Reserve Bank of Australia (RBA) to cut its cash rate from a record low 1.50 percent by the end of this year.
The RBA will hold its first policy meeting of the year on Feb. 5 and is widely expected to leave rates unchanged. There is increasing uncertainty, however, over whether policymakers would tilt to a dovish stance.
So far, Governor Philip Lowe has held a glass half-full view of the A$1.8 trillion economy which is in its 27th year of recession-free expansion, the unemployment rate is at a 6-1/2-year trough of 5.0 percent and the drag from the end of the mining investment boom is fading.
"To say there is a lot of focus on in the week ahead is an understatement," said ANZ economists said in a note.
Lowe will give his first speech of the year on Feb. 6 - just a day after the board meeting while the RBA will publish its quarterly economic outlook on Friday.
"We think the Bank will revise down its growth forecasts, but retain a positive medium-term outlook," they added.
"This should see it continuing to express the view that the next move in rates is most likely up, if some way off. But the Bank has a lot to consider, so a shift to a neutral stance can’t be ruled out."
(Editing by Jacqueline Wong)
